Money can be made from stocks in two different ways, appreciation and dividends. Appreciation occurs when a stock increases in value. Then we have dividends.
Dividends are periodic payments to shareholders. Companies provide their investors with dividends to reward them for putting money into their company, similar to how companies sometimes pay bonuses to their employees.
Not every company distributes dividends to shareholders. Since dividends come from a company’s profits, most small companies do not have the cash to issue dividends. Dividends are more common in larger mature companies.
Dividends are paid out based on a percentage called the dividend yield. If a company decides to issue a dividend, investors can calculate their expected payment by multiplying the dividend yield by the stock’s market price. A higher dividend yield would indicate that a company will pay out a larger dividend.
Dividend yield * Market Price = Dividend Per Share
For example, let's say the company Pane in the Glass Window Fixers decides to issue a dividend. Their stock price is $50 and they set the dividend yield at 10%. A shareholder's dividend per share would be $5.00 ($50 x 10% = $5.00). This means that they would receive $5.00 in cash for every share they owned.
Money that is not distributed as a dividend is reinvested back into the company.
We have learned a lot so far. We have covered risk, stocks, the stock market, capital gains, taxes, and more. Let’s find out what fractional shares are all about.